Economy weaker than expected in second quarter

WASHINGTON— The economy braked more sharply than expected in the second quarter as shoppers curbed their free-spending ways amid a sharp advance in energy prices, government data released Friday showed.

Gross domestic product, a measure of total output within the nation's borders, climbed at a 3% annual pace in the April-June period after an upwardly revised 4.5% clip at the start of the year, the Commerce Department said.

Economists had looked for GDP to advance at a 3.6% pace after the previously reported rise of 3.9% in the first quarter.

"We're looking at a more pronounced than expected slowing of economic activity, mostly because of the shockingly small increase by consumer spending," Moody's Investors Service chief economist John Lonski said.

While the latest quarter proved weaker than expected, some recent signs suggest the economy's pace has already quickened.

Still, the tepid second-quarter figure is no boon for President Bush, who would like to see a stronger expansion as the November presidential election approaches.

Consumer spending rose at just a 1% rate in the second quarter, a mere shadow of the robust 4.1% first-quarter gain and the slowest increase since 2001, when the economy was in recession.
Economists had looked for a consumer-led slowdown, but could be surprised by the extent shoppers kept their wallets shut.

Big energy price hikes were one factor analysts have pointed to in explaining why consumer spending slackened in the spring. Friday's data showed inflation — gauged by a measure favored by policymakers at the Federal Reserve — rose at a relatively high 3.3% rate in the second quarter, matching the first-quarter's pace.

Stripping out volatile food and energy prices, that gauge, the price index for consumer spending, climbed at only a 1.8% rate, a slowdown from a 2.1% increase in the first quarter.

Fed officials have expressed concern over the extent to which prices have surged this year, but said they should be able to move borrowing costs higher at a "measured" pace, in part because the unemployment rate remains relatively high.

Economists say the slowing in so-called core inflation bolsters the case for gradual rate rises.
"What we see in this data is the Fed will stick to their measured pace or maybe even slow down a bit," said Kevin Logan, an economist with Dresdner Kleinwort Wasserstein in New York.

The GDP report showed growth in business outlays advanced at a solid 8.9% pace, more than doubling the rise in the January-March period. Firms continued to build inventories, but the amount stockpiled was only slightly ahead of the first quarter and offered just a slight boost to second-quarter growth.

Federal Reserve Chairman Alan Greenspan told Congress last week a June soft patch in the economy would prove temporary. "There is no real underlying evidence of any cumulative weakness here," he said.